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Cayman Funds 2016

ALTERNATIVE INVESTMENT MANAGEMENT ASSOCIATION Hedge funds are playing a big part in films and on the TV these days but their enduring bad press needs to be vigorously countered, say the AIMA’s Henry Smith and Russell Burt. CAYMAN FUNDS | 2016 59 Shutterstock / Rawpixel.com Once an industry which appeared secretive and opaque, the alternative investment funds industry now finds itself front and centre in the primetime news, movies and on TV. Recent movies such as “The Big Short” and Showtime’s “Billions” are just two examples of the popular appeal of the industry for the media. The number of books published on hedge funds could fill a library. While these are very entertaining and, to a limited extent, informative, unfortunately there continue to be politicians and political candidates in the UK, the US and the EU who unfortunately tend to expound populist views that there is something inherently bad about hedge funds. Populist myths claim they are secretive and only there to enrich the wealthy; they are unregulated, non-compliant and contributors to the global financial crisis; they cause job losses by asset-stripping companies; they are based in secretive offshore tax havens and do not pay their fair share of taxes; and that they perform poorly against major market indices. The mainstream media, by focusing on the excesses on Wall Street or the few instances where a major hedge fund has failed, unfairly hype these views. These myths need to be dispelled. In recent years this has begun to happen as political candidates for high office in the US from both the Democrat and Republican parties and in Australia with investments in hedge and private equity funds in the Cayman Islands have answered their critics by simply highlighting that there is nothing wrong with these types of investments which are now well established investment products bought by institutional investors and pension funds the world over. It is a tough ongoing challenge to change general public perceptions, but it is worth persevering as in many cases these views are not simply uninformed and just plain wrong but, more important, may also lead politicians and regulators to develop bad policy and disproportionate regulation to the detriment of those same voters and constituents they seek to protect or represent, and ultimately damage economies. The Alternative Investment Management Association (AIMA) continues to work hard to educate politicians, regulators and journalists about what really goes on in the industry. AIMA’s excellent research papers pulled together in “The Case for the Hedge Funds: A Compendium of Thought Leadership Reports” and the upcoming “Transparent, Sophisticated, Tax Neutral: The Truth about Offshore Funds” are well worth reading. Fight the good fight Here are some of the key messages to help address these PR challenges: The global financial crisis: blaming hedge funds for the global financial crisis was unwarranted. Official reports prepared for international regulators and various authorities acknowledged that hedge funds did not cause the global financial crisis—it was triggered by failures in the regulated banking industries. Even the largest hedge and private equity funds are neither ‘too big to fail’ and nor do they represent a systemic risk to the markets. Leverage in most typical hedge funds rarely exceeds one to two times assets (as opposed to as much as 40 times assets in the banking industry) and no hedge or private equity fund required a state funded bailout. Hedge funds in fact brought much needed liquidity to the markets after the crisis. The benefits to the global economy: critics claim that hedge funds serve no useful purpose and are merely vehicles for wild speculation, benefiting only the wealthy, often attacking currencies and shorting companies into oblivion or stripping jobs for their own profit. The reality is different. Hedge funds are an integral part of the asset management industry and contribute to the economy in many positive ways: • Job creation and tax. Hedge funds have created an estimated 300,000 jobs globally, including 240,000 in North America, 50,000 in Europe and 10,000 in Asia-Pacific. They contribute a sizable chunk of GDP in countries where the industries are located. This in turn generates significant taxable revenue for governments. For example, in Europe taxable revenue is thought to be in excess of $8 billion; and that’s before you get to the knock-on benefits to other industries—real estate, restaurants, car dealers, etc—where these jobs are located and the consequential tax revenue generated. While it might be seen as politically attractive to criticise the industry or seek to raise further tax revenues from the funds or workers in the industry, governments need to be careful that they do not reach a tipping point where their financial centres become uncompetitive and risk losing financial services business, with all the consequential effects for their economies. • Capital allocation. Hedge funds are useful capital allocators and providers of market liquidity. Prior to and since the crisis, the hedge and private equity funds have continued to step up to provide diversified funding sources to businesses to help them grow. They facilitate global capital investment flows into the major and developing economies and finance vital infrastructure projects and assets, such as commercial aircraft, ships, hospitals, roads and power plants in emerging market countries. Again, all of these are examples of how the industry helps economies create jobs and taxable revenues. • Short selling. Rather than being a problem, as some politicians believe them to be, short sellers in fact provide essential liquidity to the markets and can often be an early indicator of which companies or sectors of the economy are about to experience difficulties. Short selling gives investors an ability to hedge the risk of being invested on a long-only basis. • Not just for the wealthy. Much of the negative rhetoric assumes that hedge funds are simply for the wealthy or that they benefit only managers of the funds themselves, and ignore other major stakeholders. Securities laws in many countries may preclude nonaccredited retail investors from investing directly in hedge funds, but about 30 percent of the over $2 trillion invested in hedge funds now comes from pension funds, which need to find ways to fund their growing pension deficits by investing in hedge funds. So everyone, through the pension funds, indirectly benefits from hedge funds’ investments and much-needed portfolio diversification. Any politically driven increased costs, taxes or regulatory and compliance expenses have an indirect adverse consequence for the individual pensioners indirectly invested in those hedge funds. Performance: market commentators unfairly criticise hedge fund performance by benchmarking performance to the long-only major market indexes. Most hedge funds are not invested in portfolios to match long-only market indexes in that way. Investors can buy


Cayman Funds 2016
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